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H.Moos: “Russia still needs to remove its dependency on commodities”

 
31.05.2011

Herbert MoosGeoff Cutmore: Let's tell you who's around the desk with us this morning. Herbert Moos has stepped in, the CFO of VTB Bank. So Herbert good to see you this morning and thank you for joining us. John Hydeskov, is Chief Analyst at Danske Markets, good to see you John. Let's just start if we might by talking about the general opportunity in Russia right now. I think we saw a rate hike yesterday. The market is still I think asking questions about how well the central bank is managing the inflation story. What, inflation officially 9% at the moment in Russia?

Herbert Moos: I think 8.8% then.

Geoff Cutmore: Are rates currently doing the job? Do you think the economy is being well managed?

Herbert Moos: I think certainly the Central Bank is reacting to the inflation threats, at the same time we are seeing a recovery of the economy. I think we're certainly past the bad debts issues, probably last quarter last year. We're seeing lending picking up significantly lead by the retail lending. Our retail business is doing very well, I think this year we're likely to see retail lending growth as high as 20%+. So clearly Central Bank is seeing a pretty significant momentum in the economy and therefore they don't see a major threat of putting too much pressure on the economy. So in that respect I think it's the right move. I don't think they will be moving as rapidly going forward. They will be looking and waiting. They also tightened the reserve requirements recently, so I think they're trying different measures trying to understand how this will ultimately impact the economy.

Geoff Cutmore: Yeah, I mean obviously Russia benefits from tremendous energy revenues streams, which means IT doesn't have quite the same problems as some of the peripheral European nations that we've been discussing this morning. But is there an awareness of these issues now that are playing out in Europe more broadly? We've talked a lot about Greece this morning obviously but you can throw Portugal and Spain and Italy I guess into the conversation as well. How is that being viewed from Moscow?

Herbert Moos: I think certainly Russia has its own host of issues and I think you mentioned the high oil price, yes IT temporarily would lead to a surplus in our budget whereas the official forecast was a deficit. I think far more important I guess for Russia is the fact that high oil prices create, if you wish, a moral hazard, in that the economy still needs to modernise, Russia still needs to remove its dependency on commodities, on resources generally and with such high oil prices, you know, clearly this motivation could be reduced. So the main focus really is on structural reforms. I mean given these high oil prices I think that's really the main challenge for Russia.

John Hydeskov: It was reported yesterday that Russian banks are looking at the situation in Eastern Europe considering buying banks up in Eastern Europe, taking advantage of the weakness of western banks. What is your view on that? Could that really take off in the next coming years?

Herbert Moos: Yes, I'm aware that some Russian banks are definitely look at this. My view is that Russia is still such an under-penetrated market from the banking services' perspectives that banks could easily generate double digit ROE's and trying to move to especially the European countries that haven't been regulated, not sure from the shareholder perspective that would be the most ROE accretive step.

Steve Sedgwick: Can I just jump in here? I was looking at the Daily Telegraph, looking at the cricket actually, but I found this distributed in the Daily Telegraph as well then, Russia Today, and just looking through the headlines I thought I knew we had Andrey coming on, so I was looking at this and obviously now Herbert, and it says the future starts here, everything looks great, if you read this everything looks great in Russia. But the future starts here, and I thought to myself this is Medvedev talking about Russia becoming the research, technology.

Herbert Moos: Yep.

Steve Sedgwick: My only problem with this headline is I've heard it before. I've heard it many times before. I've heard Medvedev talking many times before, I was reading in The Economist two years ago about how Medvedev was going to turn Russia into a technology hub as well. It's not happening is it? Is it? When will Russia make good that competes with Silicon Valley, that competes with China, that competes in a very small way with some of the companies in the UK, the Arm Holdings of this world? And I'm just wondering when this is going to happen, because they keep promising.

Herbert Moos: I mean certainly the dependency is still there, as I said, and I think that's something that the crisis actually helped to realise better and better. I think the prior elections we still, Russia still was going through a period of very rapid growth, there was real little impetus to actually engage in that. I think the crisis had shown that, you know, the dependency on energy makes you incredibly vulnerable to those shocks. So I think the liberal part of the government is obviously very focused on the reforms. There is potential. I think if you look at the labour force, you know Russia has an educated labour force, what is lacking of course is the infrastructure and as you said real progress in, you know, making innovation, you know, modernisation as part of the real economy and that's really the challenge.

Steve Sedgwick: And I hear it's getting a huge migrant, well according to this report, Moscow the great migrant magnet as well, and just talking about the huge numbers of migrants coming into the country as well to swell that workforce. And the question I suppose is the same as the German question, are those migrants actually the kind of migrants you want ie people who are bringing with them professional skills in technology, in all kinds of spheres and that's the question I guess?

Herbert Moos: Of course, I think the challenge would be to integrate those people and infrastructure still continues to be a weaker part of Russia, especially Moscow. I think again here what we've seen is we've seen a change in the Mayor. I think a lot of focus has now been put on improving the infrastructure of Moscow. So the idea would be to divest of all the non-core businesses as Mayor that I mentioned and really focus on governing the city, on integrating people and creating infrastructure.

Steve Sedgwick: All right, Herbert, I think you're staying with us. So we'll carry on the conversation in a few moments time.

Geoff Cutmore: Well let's move on and let's continue our conversation about Russia. The Central Bank yesterday surprised markets by raising its deposit rate. The bank cited inflation expectations and risks to economic growth as reasons for the move. The hike followed growing official concern over capital outflows that have exceeded $50 billion in the past 7 months. The Central Bank indicated that current rates will be acceptable in coming months. A reminder to you, we have Herbert Moos with us, CFO of VTB Bank and John Hydeskov, Chief Analyst at Danske Markets. Very interesting email in from Clemence, who asks about the currency crisis in Belarus and just is interested as to whether you have any view on Russia's relationship with Belarus and your view on what's happening in Belarus in particular. I mean here's a country now that's running an interest rate at 16%, I mean phenomenal.

Herbert Moos: I think clearly the country needs a sound economic model. Sound banking system behind it, not just administrative measures and then obviously all those things will ultimately lead to devaluations and this micro-crisis. I think fundamentally the economy hasn't really diversified itself over the last, you know, many years.

Geoff Cutmore: It's a challenge isn't it, because your natural opportunities would be very much in former Soviet Republics around Mother Russia, but the poor management of those economies, particularly the financial economies in those countries, must temper your enthusiasm to be involved?

Herbert Moos: Absolutely. I think we're a commercial player. We chose the spaces where we want to play. I think what you would see is the good example would Ukraine. Right, Ukraine also suffered for many, many years of political and probably economic mismanagement. More recently they had a government that engaged with the IMF, engaged in a dialogue around reforms and VTB is now the largest Russian bank in Ukraine.

Anna Edwards: Well then that sort of takes us back to the political dimension that we were bringing in earlier because I know that President Medvedev has recently spoken about the Ukraine's need to choose whether it wants to operate in the sphere of Europe or in the sphere of the CIS. I mean from your position on the board of a big Russian bank, does it matter to you, because you have said that you're very keen on Russian growth but you're also pretty interested in this growth story in the former Soviet Republics?

Herbert Moos: Absolutely. I think from our perspective Ukraine is incredibly tightly linked to Russia in terms of the consumers, in terms of resources, you know a lot of resource or gas transit goes through Ukraine. Now we've seen more recently a very significant trend by the largest Russian corporates becoming very acquisitive and essentially, you know, integrating their supply chains or their consumers in Ukraine. So we saw significant M&A activity. VTB is unique in the sense that in addition to the corporate and retail banking we also have a very large investment bank. So we're actually facilitating a lot of the outward M&A that Russia currently has with Ukraine. So in that respect of course there's a political motivation and dialogue and discussion around Europe or Russia, but economically the two countries are incredibly tight.

Geoff Cutmore: So just before we let you go here, are we going to get any big announcements on deals from VTB in the near term? What's the strategy? I mean we had Andrey in a couple of weeks back and he insists organic is the way to go, but it's not how you grow fast, is it?

Herbert Moos: Absolutely. I think we recognise that organic growth led us to become the second largest bank, but equally we want to focus on becoming the most efficient bank, and if you look at our, you know, capital adequacy we were running as high as 20%, so obviously a very different story to many European banks. Fortunately Russia and the former Soviet Union space is full of very interesting acquisition targets, ROE accretive opportunities. So in that respect as you know we have announced the two major acquisitions, that's TransCreditBank, the captive bank of Russian railways, the largest employer in Russia with 1 million employees, and more recently Bank of Moscow. So in that respect for this year I think we feel pretty good in terms of our, we still need to demonstrate ability to digest those stories, to integrate them. Over the last 7 years VTB bought 10 banks and, you know, touch wood, so far we integrated them all well and so now the challenge of the other two, then we'll look at it again.

Anna Edwards: Are you worried, one of President Medvedev's messages to try and differentiate himself perhaps a little bit from Prime Minister Putin has been about FDI and the rule of law and trying to encourage both of those. How do you feel about the level of FDI into Russia at the moment? Is it something that you want to see more of? What does he need to do there?

Herbert Moos: I think certainly there's a lot of room to improve, you know, corporate governance and corporates so that FDI's can be flown in real opportunities of legal system, but also create an appropriate investment climate. I think for that reason I think Russia has announced a very large privatisation programme to essentially improve access of investors to Russian markets. We're very glad to be the first privatisation, so VTB in February as you know sold 10%, or the government sold a 10% stake. It was a very successful IPO or SPO. We had a book two times over-subscribed, very large interest, it was the largest privatisation in Russia so far, 3.3 billion. Very good participation from sovereign wealth funds and largest investors.

Geoff Cutmore: Herbert, we're going to wrap it up.

Herbert Moos: Sure.

Geoff Cutmore: But thanks for coming in.

Herbert Moos: All right, thank you.

Geoff Cutmore: Herbert Moos, the CFO of VTB Bank.


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